So why is a credit score so important?

Here's Why Your Credit Score Is Important

Your credit score determines whether or not you get the best and lowest interest rates when financing a house, a car or a loan. Did you know that a credit score also affects getting the lowest auto or life insurance premium? Were you aware that your credit score can definitely affect getting that next job! That's right, more and more cross over industries are using your credit score to determine your reliability or level of risk. 

With that said and that was a mouthful, here's a look into how the scores are determined. 

Complex Formulas

Your credit score is a result of credit agencies gathering your credit information, as reported by your creditors every month. They use large databases to calculate a rating about you and your credit behavior.

In fact the three major credit reporting agencies Equifax, TransUnion and Experian set the credit reporting standard for major banks, lenders and credit companies. That's because they use an accurate formulation known as FICO. This stands for Fair Isaac and Company and the FICO score utilizes many factors that determine credit scores.

Besides the financial industry, the insurance and even employers are using credit scores as a way of determining your historical activity regarding credit is rated. Each of these industries as well as each company use complex formulas to calculate a rating regardless if the standard is the FICO. So no one company or industry score is equal.

Here are some of the factors in determining your score:

• Payment History
• Amounts Owed
• Length of Credit History
• New Credit
• Types of Credit in Use

Here are some of the reasons of how your score will be categorized:

• Serious delinquency
• Serious delinquency, and public record or collection filed.
• Derogatory public record or collection filed.
• Time since the delinquency is too recent or unknown.
• Level of delinquency on accounts.
• Number of accounts with delinquency.
• Amount owed on accounts.
• Proportion of balances to credit limits on revolving accounts is too high.
• Length of time accounts have been established.
• Too many accounts with high balances.

CREDIT SCORES ARE NOT ALL EQUAL!

That's because these CRA's each use different elements of this complex FICO and can create their own FICO model. So when your credit report score is revealed to you, the scores are different. To make matters more confusing even frustrating, if you as a consumer initiate your own credit report, do not be surprised that your scores will not match when a lender pulls your credit report with your scores. Chances are they will be different. As a consumer you are provided consumer ratings. Likewise as a financial company they are privy to the commercial reporting.

THE REAL IMPORTANCE OF IT ALL

The main reason you use a score such as FICO is to know where you rate in the credit world and more importantly how you can improve. Improving your credit score is key in determining how you qualify for the best possible rates a bank or credit card company can offer. Knowing your score means that you need to take a proactive stance to correct your credit report. Don't rely on your creditors!

While there's no quick fix to improving your score there are some immediate results that you can get with the information gathered from your credit report to improve your credit score.

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 Curt de la Cruz is a free lance writer and is a professional in the mortgage industry. Visit his website at 101-credit-debt-finance.com